TY - JOUR
AU - Andersson,Fredrik
AU - Freedman,Matthew
AU - Haltiwanger,John C.
AU - Lane,Julia
AU - Shaw,Kathryn L.
TI - Reaching for the Stars: Who Pays for Talent in Innovative Industries?
JF - National Bureau of Economic Research Working Paper Series
VL - No. 12435
PY - 2006
Y2 - August 2006
DO - 10.3386/w12435
UR - http://www.nber.org/papers/w12435
L1 - http://www.nber.org/papers/w12435.pdf
N1 - Author contact info:
Fredrik Andersson
Economics Department
The Office of the Comptroller of the Currency
400 7th St. SW
Washington, DC 20219
Tel: (202) 649-5528
Fax: (571) 465-3246
E-Mail: Fredrik.Andersson@occ.treas.gov
Matthew Freedman
Drexel University
Department of Economics
1025 Gerri C. LeBow Hall
3220 Market Street
Philadelphia, PA 19104
E-Mail: matthew.freedman@drexel.edu
John C. Haltiwanger
Department of Economics
University of Maryland
College Park, MD 20742
Tel: 301/405-3504
Fax: 301/405-3542
E-Mail: haltiwan@econ.umd.edu
Julia Lane
American Institutes of Research
E-Mail: jlane@air.org
Kathryn L. Shaw
Graduate School of Business
Stanford University
Stanford, CA 94305-5015
Tel: 650/725-4168
Fax: 650/725-0468
E-Mail: kathryns@gsb.stanford.edu
AB - Innovation in the U.S. economy is about employing and rewarding highly talented workers to produce new products. Using unique longitudinal matched employer-employee data, this paper makes a key connection between talent and firms in markets with risky product innovations. We show that software firms that operate in product markets with highly skewed returns to innovation, or high variance payoffs, are more likely to attract and pay for star workers. Thus, firms in high variance product markets pay more up-front--in starting salaries--to attract and motivate star employees, because if these star workers produce home-run innovations, the firm's winnings will be huge. However, we also find these same firms pay highly for loyalty: star workers that stay with a firm have much higher earnings in firms with high variance product market payoffs. The large effects on earnings are robust to the inclusion of a wide range of controls for both workers and firm characteristics. One key control is that we also show that in firms that have actually hit home runs, with high revenues, the rewards for star talent are even greater. We also find that the dispersion of earnings is higher within firms with high variance product payoffs.
ER -